The 10 best states to succeed with a small business

Anna Helhoski December 28, 2015

Way to go, North Dakota!

The odds of survival aren’t great for small businesses. About half of them are still standing after five years, and only a third make it to a decade or longer, according to the Small Business Administration. That’s why new entrepreneurs need to do everything they can to improve their chances — including picking the best states to succeed with a small business.

SMBs thrive in states with the right mix of innovation, financing and opportunities to grow.

NerdWallet analyzed data on all 50 states to identify where small businesses prosper. We looked at survival rates, the average amount of a business loan and more. We found that the top states demonstrate a healthy mix of innovation, opportunities to grow, a strong business environment and access to financing.

Key results: Best states to succeed with a small business

Loans vary across states. Small businesses in highly ranked states such as Colorado and Alaska received nearly four times more in loans than small businesses in other states. Small businesses in New England states — none of which made the top 10 — received less than $3,000 in loans per employee, on average. The national average in loans per employee is $3,182.

You need the right mix. While financing is crucial to small business success, our analysis demonstrated that there are other factors to take into consideration. Michigan, despite ranking first in the small business financing category, didn’t make the top 10 list.

Skilled workers make up at least 90% of the population in the best states to succeed with a small business.

Go where the talent is. Being able to choose from a strong labor pool can help small businesses succeed. Skilled workers make up 90 percent or more of the population in each of the top 10 states.

Failure exists everywhere. Even small businesses in states where the environment for success is strongest still face potential failure. Not a single state on the list had a small business survival rate of over 46 percent.

10 best states for small businesses success

1. North Dakota

North Dakota led the way, coming in first for small business environment and small business opportunity. Within those categories, it excelled in these areas:

Small business growth rate: 9.58% (rank: No. 1)
Small business survival rate: 45.1% (rank: No. 1)
Average wage growth: 6.7% (rank: No. 1)

2. Utah

The Beehive State showed good balance, as it ranked first in small business innovation, second in small business opportunity, and sixth in small business financing. Within those categories, Utah scored high in these areas:

Patents filed per 100,000 residents: 13.11 (rank: No. 1)
Small business growth rate: 8.43% (rank: No. 2)

3. South Dakota

Posting strong rankings in all four subcategories, South Dakota ranked third in small business environment, fourth for small business opportunity, and eighth for small business innovation and small business financing. Within those categories, it scored well in these areas:

Small business survival rate: 43.9% (rank: No. 2)
Small business growth rate: 6.19% (rank: No. 5)
Small business loan value per employee: $4,010 (rank: No. 7)

4. Colorado

Colorado ranked second in small business financing, fifth for small business innovation, and eighth for small business opportunity. Within those categories, this state scored high in these areas:

Small business loan value per employee: $4,190 (rank: No. 2)
Health care premiums as a percentage of income: 9.23% (rank: No. 7)

5. Wyoming

Wyoming was third in small business opportunity, fourth in small business environment, and seventh in small business innovation. Within these categories, it was strong in these areas:

Average wage growth: 4.83% (rank: No. 2)
Small business growth rate: 6.4% (rank: No. 3)

6. Minnesota

The North Star State was an entrepreneurial beacon, ranking third in small business innovation. Within that category, Minnesota scored high in these areas:

Skilled workers in population: 92.1% (rank: No. 2)
Patents filed per 100,000 residents: 7.85 (rank: No. 8)

7. Montana

Montana ranked seventh for small business opportunity and was just outside the top 10 for small business environment. Within those categories, it scored well in these areas:

Small business survival rate: 42.1% (rank: No. 5)
Average wage growth: 3.93% (rank: No. 5)

8. Alaska

The Last Frontier was fifth in small business financing and ninth for small business environment. It was also just shy of making the top 10 cities for small business innovation. Within those categories, Alaska scored high in these areas:

State tax rate: 7% (rank: No. 2)
Small business loan value per employee: $4,125 (rank: No. 3)

9. Washington

Washington ranked sixth in small business environment and ninth for small business innovation. Within those categories, it was strong in these areas:

Average wage growth: 4.32% (rank: No. 3)
Small business survival rate: 38.7% (rank: No. 9)
Patents filed per 100,000 residents: 7.39 (rank: No. 10)

10. Hawaii

The Aloha State came in second in small business environment. Within that category, Hawaii scored high in these areas:

Health care premiums as percentage of income: 7.76% (rank: No. 2)
Small business survival rate: 42.3% (rank: No. 4)

Methodology

The overall score consists of four components — innovation, opportunity, environment and financing availability — that are each worth 25 percent.

The innovation score includes the number of patents filed in 2014 per 100,000 people and the percentage of skilled workers as measured by the U.S. Census Bureau’s American Community Survey (ACS).

The opportunity score factors in the small business growth rate from the Small Business Administration (SBA), the state unemployment rate from the Bureau of Labor Statistics (BLS), median income growth from the ACS and the population growth rate from the ACS.

The environment score includes the business survival rate as measured by the SBA, the average wage growth from the BLS, health care premiums as a percentage of income as measured by the Commonwealth Fund and the state tax rate from the Tax Foundation.

The financing availability score consists of the small business loan value per employee from the SBA and the percentage of underbanked residents, which is used as a measurement of accessibility to local banks by the Federal Deposit Insurance Corp.

Did your state make the list? Let us know in the comments below!

Image by: North Dakota Tourism/Jason Lindsey